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HK IPO retail frenzy needs to be kept in check

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By Jonathan Breen
23 Feb 2021

The huge retail investor demand for some recent Hong Kong IPOs has caught the stock exchange’s attention, leading to an investigation into how retail accounts place orders. The move will offer some welcome relief to institutional investors losing out on some of the city’s largest listings.

Hong Kong’s IPO market has been on a tear this year, with retail investors pumping in hundreds of thousands of orders for some high-profile trades, covering their tranches of typically 10% of deals many times over.

This has raised some red flags at the Hong Kong Stock Exchange, which is understood to be investigating whether some of these orders may be duplicates.

Its concern is understandable. The high level of demand for IPOs from local investors has often been viewed sceptically in the past but the HK$2bn ($263.1m) offering by New Horizon Health this month stole the show by receiving as many as 1m retail orders, or an oversubscription of more than 4,100 times. The Special Administrative Region has a total population of close to 8m suggesting nearly 13% of the population placed orders for the deal, a number that is hard to swallow. The stock saw a first-day trading pop of about 215%.

The exchange is probing brokers specifically because of a loophole that allows individuals to invest in one IPO through different accounts at multiple brokers. How the HKEX will rectify the issue if it finds multiple orders from the same buyers is unclear but its task will be uphill given the challenge around identifying each of the beneficial owners of the shares.

Nevertheless, the retail crackdown bodes well for the Hong Kong IPO market and its long-term growth and sustainability.

This is because when the market is hot, retail investors are the bane of many Hong Kong listings due to a clawback mechanism for IPOs. This reallocates shares to the retail tranche based on the level of demand from local accounts. It is typically capped at 50% of the base offer.

If a clawback is triggered, the international investor tranche is scaled back. And given most deals include some level of cornerstone investment, institutional funds are typically left fighting over a marginal piece of the IPO, the bulk of which is often made up of the over-allotment option.

If the retail demand is brought under control, issuers and their IPO sponsors can place more stock with international investors. This is good news not just for asset-hungry global funds but also for issuers, which would like to place as much stock as possible in the hands of long-term sophisticated buyers before mom-and-pop investors.

Prospective Hong Kong issuers can, admittedly, seek waivers when applying for an IPO that allow them to reduce the amount of stock they have to allocate to retail investors and the maximum clawback level.

But how the waivers are determined and granted is unclear to many market participants and can appear arbitrary. Typically, multi-billion-dollar deals have received waivers. For example, video-sharing platform Kuaishou’s listing earlier this month, worth HK$42bn and whose retail tranche was oversubscribed by more than 1,200 times, got a waiver on the clawback.

Recent IPOs in Hong Kong have recorded subscriptions of over 1,000 times for the local tranche.

New Horizon, a maker of early screening kits for cancer, saw the retail portion of its listing covered more than 4,100 times. Not counting the cornerstone tranche, just $47m of the IPO was left for institutional investors and 85% of the accounts ultimately received no stock. Yidu Tech’s January listing received a more than 1,600 times oversubscribed retail book. Its shares soared nearly 150% on their debut.

Any effort by the HKEX to keep retail demand for IPOs in check is laudable.

The benchmark Hang Seng Index has gained nearly 12% year-to-date, breaking 30,000 points in late January. While retail investors have taken advantage of that rally, they can get easily burnt if markets do a U-turn, which will in turn impact Hong Kong’s equity capital market.

Forcing them to take a step back now will be a good move in the long run.

By Jonathan Breen
23 Feb 2021